Multi-layer structures: the Cayman tax dives deep
cayman (ˈkeɪ mən) n., pl. -mans, any of several tropical American crocodilians of the genus Caiman and allied genera
- tax: a type of tax, esp. one perceived by those subject to it as highly complex, unduly intrusive and/or difficult to avoid.
With about 800 codes, a Belgian income tax return is not for the faint-hearted. When the Cayman tax is involved, even more attention is needed. Read all about it here and avoid the Cayman tax pitfalls in your income tax planning.
This week, we escape from the heat wave and take a refreshing plunge with the cayman!
Caymans hide in the water while hunting. With their eyes, ears and nostrils on top of their heads, they can keep almost their entire body under water to sneak up on their preys.
While its namesake in the animal kingdom prefers to stay close to the surface, the Cayman tax is more of the deep diving type.
As explored earlier in this documentary, founders of targeted entities are subject to a look-through-tax on the basis of which they are taxed on the income of the entity, as if the founder received the income directly, and as if the entity did not exist.
In case of a multi-layer structure, the Cayman tax dives deep and applies the look-through-tax to all targeted entities in the multi-layer (chain) structure.
Before continuing to explore other targeted entities in the next episodes, we take a break from the heat wave and take a refreshing plunge with the cayman!
Meet the matriarchy
Before dissecting the mechanism of the look-through-tax, we introduce you to the family.
The Cayman tax installed a matriarchy, a so-called chain structure, and defines mother structures (parent structure) and daughter structures (subsidiaries).
A daughter structure is a targeted entity of which the shares or economic rights are (partially) held by another targeted entity.
A mother structure is a targeted entity that holds (all or part of) the shares or economic rights of other targeted entities.
A chain structure concerns the targeted entity together with all its daughter structures.
If the chain structure includes a daughter structure that is also a mother structure, all daughter structures of this mother structure are also part of the same chain structure. This exercise is repeated until all daughter structures of the mother structures that are part of the chain structure are included in the chain structure.
This means that targeted entities of a multi-layer structure are to be included in the chain structure. A non-targeted entity serves as a blocker, taking entities lower down the chain outside the scope of the Cayman tax.
The reverse dive in the pike position
Since 2018, the look-through tax has been applicable to the income of all entities included in the chain structure. Here come the look-through-tax’ instructions for diving:
- A daughter structure’s income is considered to be part of the mother structure’s income, in proportion to the percentage of shares or economic rights held in the daughter structure, as if the mother structure received this income directly;
- Income that is distributed by a daughter structure to a mother structure is not taxable in the hands of the founder to the extent it can be demonstrated that the income has already been subject to its appropriate Belgian tax regime. Such distributions are deemed to be made on a FIFO basis;
- If more than two targeted entities are part of a chain structure, the previous two rules are applicable to all mother structures that are part of the chain structure;
The application of the aforesaid rules cannot lead to income from targeted entities being taxed multiple times in the hands of the founder.
The reverse two and a half somersaults in the tuck position
Philippe is a fancy diving athlete and has lived all over the world to work with the best trainers.
As a fancy diving athlete, Philippe is a big fan of heights. He therefore invested his prize money and income from sponsoring via a multi-layer structure. Philippe has set up a trust that holds 50% of the shares of a BVI company. The BVI company holds an investment portfolio as well as 100% of the shares of a Belgian company that, in its turn, holds the shares of a Guernsey company.
When his twists and somersaults became a bit rusty, Philippe decided to retire as an athlete and settled down in Belgium to work as a trainer.
Both the BVI company and the Guernsey company are subject to an income tax that is lower than 15% calculated on a Belgian taxable basis.
This means that Philippe’s multi-layer structure consists of 3 entities that are targeted by the Cayman tax: the trust, the BVI company and the Guernsey company.
Philippe will however only be subject to the look-through-tax in respect of the income of the targeted entities that are part of the chain structure, i. e. the trust and the BVI company. As the Belgian company is not targeted by the Cayman tax, the Belgian company serves as a blocker for the Guernsey company – the Cayman tax is not applicable in respect of the Guernsey company.
In 2019, the BVI company did not make a distribution to the trust. Therefore, in 2019, the trust did not receive any income. However, the income of the BVI company (daughter structure) is deemed to be part of the trust’s income (mother structure).
The BVI company received interest for an amount of 10 and dividends for an amount of 20 in the investment portfolio. The Belgian company did not make a dividend distribution.
50% of the BVI company’s income, i.e. 15, is deemed to be part of the trust’s income as 50% of the shares of the BVI company are held by the trust.
Philippe will be subject to Belgian income tax on the income of 15 on the basis of the look-through-tax.
Avoid a belly flop
Fancy diving athletes know that extra height increases the risks involved. Athletes who want to perform an arm stand and a reverse three and a half somersaults, either in the pike or tuck position, therefore know to start practice well in advance not only to obtain an excellent score but also to avoid serious injury.
As with fancy diving, the more targeted entities in the multi-layer (chain) structure, the more complex the impact of the Cayman tax. Start your analysis in time and avoid a belly flop!